Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

PEGA earnings call for the period ending December 31, 2018.

Contents:

Prepared Remarks

Questions and Answers

Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Pegasystems fourth-quarter and full-year 2018 earnings results call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ken Stillwell, chief financial officer, chief administrative officer, and senior vice president. Please go ahead, sir.

Thank you. Good evening, ladies and gentlemen, and welcome to Pegasystems' Q4 2018 earnings call. Before we begin, I'd like to read our safe harbor statement. Certain statements contained in this presentation may be construed as forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

The words expects, anticipates, intends, plans, believes, could, should, estimate, may, target, strategies, intends to, projects, forecasts, guidance, likely, and usually or variations of such words or other similar expressions identify forward-looking statements, which speak only as of the date the statement was made and are based on current expectations and assumptions. Because such statements deal with future events, they are subject to various risks and uncertainties. Actual results for fiscal-year 2019 and beyond could differ materially from the company's current expectations. Factors that could cause the company's results to differ materially from those expressed in forward-looking statements are contained in the company's press release announcing its Q4 2019 earnings, and in the company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31st, 2018 and other recent filings with the SEC.

Investors are cautioned not to place undue reliance on such forward-looking statements, and there are no assurances that the matters contained in such statements will be achieved. Although subsequent events may cause our view to change, except as required by applicable law, we do not undertake and specifically disclaim any obligation to publicly update or revise these forward-looking statements whether as a result of new information, future events or otherwise. And with that, I'll turn the call over to Alan Trefler, founder and CEO of Pegasystems.

Alan Trefler -- Chairman & Chief Executive Officer

Thank you, Ken. Q4 was strong, capping off a terrific year, and I'm pleased that our strategy is playing out. And we're more convinced than ever that we have the right solutions and vision for what the market needs. As we've discussed, our goals are to accelerate growth while we move to a more recurring model.

And our year-end results demonstrate the progress we're making. A lot of this is continuations of the trends we've discussed over the year. We're seeing an acceleration in our move to the cloud and other recurring arrangements. And our trademarked Cloud Choice message is resonating.

And really, all of our client deals are being deployed with Cloud Choice as an important factor. And in 2018, amazingly, Pega Cloud, where we're actually the full service cloud provider, represented half of all new deals compared to that being in the low 20% in 2017. This is a very positive development in terms of driving recurring revenue and cash flow over the longer term. Now you know we started talking very much about ACV well over a year ago, and our strong underlying business trends are reflected in license and cloud annual contract value that's ACV, growing 40% year over year.

And total ACV, which includes maintenance, grew at a very healthy 23% from a year ago to $570 million. As we've discussed over the past several quarters, ACV is the measure we're most focused on because we think it most closely reflects our underlying business trends while we work through our transition to being a cloud and as-a-service company. But as we've also said, it's important to look at current performance, as well as future obligations in our commitments from clients to really understand the health of the business. And Ken will go into more detail with that when he picks up in the moment.

Q4 showed us with an annual run rate of $1 billion for each of billings and collections, which is very exciting. And I'm especially pleased this year to see a strong Q4, following a strong Q2 and Q3. I think this is a result of greater consistency in our sales team performance, of course with significant wins as well throughout 2018, all of which confirms that our strategy is working and that we're doing a good job of onboarding our new staff over the last couple of years. So, really pleased with our financial results.

We believe there's even more we can do to capture a improved portion of the immense opportunity before us, which is why our strategy is critical to continually and working to accelerate our growth. So in terms of strategy and differentiators that Pega has, throughout 2018 we focused our efforts on continuing to deliver the best solutions for client engagement, formerly known as CRM; and digital process automation, formerly known as workflow. This strategy culminated in the launch of Pega Infinity, our future-proof digital transformation platform powered by six key differentiators at the core of our competitive advantage. We do deep analysis of our deals, and we're finding that we're winning business because of the differentiation and the solutions we provide and the way it lets our customers think about their future.

These differentiators include: real-time omni channel A.I. to deliver the right next best action and insight at every client interaction; end-to-end automation and robotics that drives process, optimization and productivity across our client's organizations; journey-centric rapid delivery that gets our clients to quick value by transforming one customer journey at a time; our Situational Layer Cake that drives usability, differentiation and specialization at enterprise scale; and software that writes itself, the industry's first and most comprehensive no code platform that automatically generates, tunes and documents the software that powers our client's enterprise applications. This enables us to offer this Cloud Choice capability that allows our customers to run on Pega Cloud as a fully managed service, choosing their future to move to Microsoft Azure, rig it on a private cloud with Pivotal or run on the Google Cloud platform, an unprecedented set of choices in a world where choice is increasingly important. Now as I referenced earlier, we made a dramatic product announcement in PegaWorld last year with Pega Infinity, which we see as the industry's most complete digital transformation suite.

And I've been delighted with the ongoing positive response we're getting for it. Not just from clients and prospects, but also from the industry by way of continued leadership ratings from top-tier analyst firms like Gartner, Forrester, Chartis and ovum. Earlier this month, we were recognized as the clear leader in Gartner's Intelligent Business Process Management Magic Quadrant for the 12th time, an accomplishment we're very proud of but never take for granted. It's an absolutely gorgeous picture that you should check out on our web site.

And you can expect to see more of a rhythm of continuous improvement in our product with enhancements moving forward as we continue to build on the differentiators I described earlier to improve client engagement and also to drive operational efficiency. Now that said, we've got some exciting announcements planned for PegaWorld this year, and we already have about 100 important speakers signed up, presenting from organizations like British Airways, Ford, Google, HSBC, Rolls Royce, Scotia, Sirius Radio, Unum and UnitedHealthcare. We'll be in Las Vegas once again on June 3 and 4, and I hope to see you there. Of course this momentum is being driven by our growing number of talented staff.

And throughout 2018, I highlighted some of the terrific very senior hires we made. They've been building out the functions and developing highly productive and innovative teams in our organization. And recently, we announced the addition of Ron Hovsepian to our board, who brings more than 30 years of deep B2B leadership experience to Pega, including as president and CEO of Novell where he led the company through the critical shift to Linux, with extensive follow-up work at leading SaaS companies. Pega is now more than 4,600 global staff strong, and we expect to actively hire through 2019 to further support our growth goals and take advantage of this tremendous set of opportunities.

This complements the great progress we have made in expanding our ecosystem, which is critical also to our strategy. It's exciting to see the company continue to grow and scale and see the terrific work being recognized by customers, prospects and analysts. So in summary, I'm very happy with our 2018 performance and particularly pleased to see good continued acceleration in license and cloud ACV. We will continue to invest prudently and appropriately in marketing and sales to ensure we can reach ambitious goals.

And I continue to be positive about how our software is being adopted and the massive level of our long-term growth opportunities. To provide more color on the financial results, let me turn this over to our CFO Ken Stillwell.

Great stuff, Alan, thanks. Before going into some of the details, I'd like to reinforce a few things. We're in the midst of a pretty significant shift of our client contractual commitments from perpetual to cloud, with is just a terrific outcome of our strategy. This shift to cloud creates a negative short-term impact on reported revenue and margins.

As Alan mentioned, in 2018, Pega Cloud commitments represented half of all new business. If we maintain our new business commitments of Pega Cloud at approximately 50%, 2018 and 2019 represent the year's most impacted by the cloud shift. During this transition, and even after the transition, annual contract value, ACV; and remaining performance obligation, RPO or backlog, are two key metrics we use to measure the growth of our business. Annual contract value is the most important measure because it reflects the growth in recurring cash flow commitments from our clients.

Remaining performance obligation, which many people refer to as backlog, represents the total client commitments that have not been taken to revenue. When assessing the performance of the business, we believe the combination of ACV, RPO backlog and revenue can provide valuable information to help interpret the results. For example, if revenue grew but ACV and RPO backlog declined, that would likely not be judged as favorably as if revenue was flat but ACV and RPO backlog grew significantly. The key is to see our business growing and producing predictable future cash flows, which is why we are laser focused on ACV.

Now let me remind everyone of several key goals we set out to achieve in 2018 and beyond. First we set a goal to accelerate growth. This is because our market opportunity is huge and we've been strengthening our position in the CRM market, which Gartner said was, "The largest enterprise software segment in 2017," and which is projected to be the fastest growing segment for years to come. Demand for digital process automation, otherwise known as BPM and robotics, has accelerated over the past couple of years as clients seek digital transformation to innovate around both their client-facing applications and their operational systems.

Pega's products continue to be recognized by clients and by industry analysts as some of the best in the market. We also believe the shift to recurring cloud deals can assist with accelerating growth and new client commitments because it encourages smaller, faster deals, and also shorter sales cycles so clients can buy and expand over time. And we saw evidence of this in 2018. Second, we set a goal of moving our business to an increasingly recurring model.

We believe this move not only drives value for shareholders but also provides velocity and adding and achieving value for our clients and provides a flexible and more predictable investment model for them. Third, we set a goal to offer Cloud Choice to our clients. We believe our Cloud Choice promise to our clients can make our cloud solutions more attractive and drive higher adoption of Pega Cloud. And fourth, we set a goal to build a business that could sustain both improvement and profitability as we scale and achieve better visibility to future recurring cash flow.

We set out to accomplish these goals while continuing to run the business under our rule of 40 longer-term targets of balancing growth and margin and continuing to invest in sales and marketing to capture the market opportunity. With these goals in mind, let's dive into our key results. Let's dive into our key results. What an exciting 2018.

The fourth quarter capped a very solid year on many fronts. Q4 2018 showed double-digit growth in new client commitments over Q4 2017, which, as many of you might recall, was a tremendous quarter. The strong Q4 execution helped drive year-over-year growth in new client commitments to over 35% for the full year of 2018. And ACV growth accelerated as well.

License and cloud subscription ACV grew 40% year over year, and total ACV accelerated to 23% year over year. At the same time, we've exceeded our expectations for accelerating to a more recurring model, with approximately 90% of new client commitments being recurring in 2018. While we significantly accelerated the move to Pega Cloud, with approximately 50% of new client commitments in 2018 being Pega Cloud, versus the 30% we originally expected for 2018. Our Cloud Choice message is resonating with clients.

And even through the significant transition to cloud, as Alan mentioned earlier, our Q4 annual run rate was $1 billion for each of billings and client cash collections for the first time in Pega's history, which is a tremendous milestone. Given these solid results, we believe we're building a business that can grow profitably as we scale and achieve better visibility to future recurring cash flow, in line with our longer-term rule of 40 targets. So now let's talk more about the impact of the cloud transition on our reported results. It's worth reminding everyone that our movement to recurring cloud commitments, although desired and strategic, results in a delay of revenue recognition compared to the timing of when the commitment is recorded.

Our movement to the cloud at this pace had the largest short-term reduction on reported revenue and margins during 2018 as it will have again in 2019. We expect improved revenue growth as we cross the cloud transition midpoint in early 2020. Presuming Pega Cloud continues to be half of total new commitments, we should complete our transition some time in early 2022, although revenue will still lag billings, as is common for a SaaS business. For 2018, we expected 30% of our new commitments to be Pega Cloud, understanding that each 1% movement away from that mix would result in at least $3 million of short-term revenue headwind.

Given that we transition faster than anticipated for 2018, we estimate the impact of reduced revenue by at least $60 million to our 2018 results. But we love the positive impact of future cash flow. To help investors evaluate our performance through the ASC 606 and cloud transitions, we began disclosing ACV in early 2017, which we've said is critical to how we look at the business. Notably, our term in cloud ACV grew by 40% year over year, which highlights the growth in predictable future cash flows from term license subscriptions and increasingly cloud.

Including maintenance, we ended the year with $570 million of total ACV, which is up 23% from a year ago and accelerating from last quarter. Total ACV now equals 63% of our trailing 12-month revenue, which is up from less than 50% of trailing 12 months revenue just a few years back. Turning to remaining performance obligation backlog. Our $631 million of remaining performance obligations backlog from clients not taken to revenue as of December 31, 2018, includes perpetual term cloud maintenance and consulting.

This increase of 20% over just last quarter is another highlight of how strong Q4 2018 was. You'll also note that $400 million of that $631 million of RPO, representing 63% of these commitments, are projected to convert to revenue in the next 12 months. The absolute number may fluctuate over time depending on the timing of future commitments, the growth of the business and the average duration of our contracts that are in our backlog. We've seen the average contract duration of our client commitments decline slightly from historical levels down to approximately three and a half years.

This is almost exactly what we expected would occur with the movement to cloud and a push for faster deal velocity. Looking at the detailed lines of revenue, our fastest growth is cloud at 62% year over year. Our slowest is perpetual license, a decline of 17% year over year. Also, consulting was flat.

These three items highlight progress against our strategy, which is to shift our business from perpetual licenses to Pega Cloud while getting clients faster value in production and to share more of our implementation work with our strategic partners. So now turning to investment areas and margin. We have consciously continued our strategic investments and go to market. And in fact, we're investing to capture a larger share of the growth opportunity.

In 2018, our sales and marketing investments closely correlated with our growth in new client commitments, which are largely recurring commitments. We're pleased to see our term in cloud ACV grow by almost twice our growth in sales and marketing expense. Given the multi-billion-dollar market opportunity in front of us, we believe that continued prudent investment will drive larger scale and ultimately a more profitable firm. We are focused on driving efficiency in our go-to-market operation as we drive higher growth rates.

And we believe both objectives are achievable and will drive tremendous value creation for shareholders over time. A recent example of improving efficiency, Pega Cloud gross margin increased by six percentage points in 2018 to 55%. This is consistent with our strategy to drive operating leverage in our cloud business and expand our gross margins as we scale. From a cash flow perspective, for the full-year 2018 we produced over $100 million of operating cash flow and finished the period with total cash and marketable securities of over $200 million.

As we transition to cloud, continue our strategic investments in sales and marketing and create long-term recurring cash flows from our clients, during this transition there will of course be lower upfront cash flow compared to a traditional perpetual model. Once we're through the transition, we expect operating cash flow to align closely to our operating margins. In 2018, we returned over $100 million to shareholders through dividends, net settlements of equity and share buybacks. This was approximately twice the level of what we returned in 2017.

Turning to our fiscal-year 2019 guidance. Assuming Pega Cloud continues as approximately half of new client commitments, we expect $965 million of revenue and $0.50 of non-GAAP EPS. We believe revenue will be slightly backend loaded in 2019 as we benefit from the progress in our cloud transition. Costs should follow a similar trend as they did in 2018, as their timing is less affected by the cloud transition.

Just as it was in 2018, the impact of the cloud shift will be significant to revenue and margins in 2019. So continuing to drive significant ACV growth is a priority and is the ultimate measure investors tell us is the most important. This is such an exciting time at Pega. Before opening the call for questions, I'd like to remind you that we host an investor day, which will be held on Monday, June 3rd during our annual conference PegaWorld at the MGM Grand in Las Vegas.

If you're interested in attending, please send an email to pegainvestorrelations@pega.com. For those who cannot join in person, we'll hold a webcast of the event accessible on our IR website. You can also reach out to me or to ICR if you want to register for PegaWorld. And with that operator, we will open the call to questions.

Questions and Answers:

Hey, Alan and Ken, thanks for taking my questions. Good to see the underlying business continue to accelerate. Ken, let me start with your comment that your guidance for next year is assuming that cloud is still going to kind of be relatively flat at about 50% of new sales for 2019. Why is that number not increasing? And I understand Cloud Choice, but i would I guess expect, given the cloud transition you're going through, for that number to at least take off.

Is that kind of specific to 2019 relative to the fact that '18 was well ahead of your expectations? And maybe how should we be thinking about that number beyond 2019?

So good question, Rishi. So we've had four quarters now where that percentage has consistently stayed around the 50% number. And when we thought about our guidance for next year, we felt that 50% was a reasonable target given that customers do have choice and there are situations where customers want to use the Pega solutions inside their own cloud environment, for instance Google Cloud, Azure, etc. Could that percentage be larger than 50%? Of course it could.

And I think that we've given some framework of how to think about the impact to revenue in the past when the percentage varies off to 50%. I think we felt that it would be a little bit aggressive to pick a number much higher than 50, given that we haven't seen that trend be higher than 50. And so that's the reason why we built the model under that framework.

Alan Trefler -- Chairman & Chief Executive Officer

And you need to remember that a Cloud Choice client may still choose to have a Pega run it for them on our cloud. That can be one of their choices. That's what happened actually with some of our perpetual license. We don't really get much Pega Cloud revenue when they do that.

It ends up hitting another one of the revenue lines. So there's no question that the practical and visceral shift to cloud is happening at a very, very profound rate. I think that we don't have a better estimate to give you than what we've seen in the last couple of quarters going into this year.

Rishi Jaluria -- Founder and Chief Executive Officer

Got it, that's helpful guys. And then if I look at perpetual license this quarter, where is that perpetual license coming from? I mean, it's not all rolling off RPO. Is that mainly existing perpetual license customers that are maybe expanding usage . Or, Alan, to your point, is it people buying perpetual licenses and then deploying it in their own environment? How should we be thinking about that line?

Alan Trefler -- Chairman & Chief Executive Officer

So it's interesting. There were certain industries, telco for example, where they spend so much on capital expenditures that they're kind of almost ignored by investors. And some of those folks who are doing purchases actually prefer to be able to show it on the capital expenditure line and they have a bias toward perpetual. On the other hand, we're really seeing that more and more companies who you would have thought of as capital purchases, have just been caught up in this as a service trend.

So it is decreasing, but our philosophy is, as long as we're getting fair prices from clients, we should sell things to them in ways that make it easier for them to buy. And that's what drives that.

Rishi Jaluria -- Founder and Chief Executive Officer

All right, got it. And if we look at the consulting, pretty, pretty steep decline year over year. Was that primarily the result of offloading more services to your partner ecosystem, selling more out-of-the-box applications that maybe have a lower services attach rate or something else?

Yes. Yes and yes. So our strategy was to drive more value of our solutions with less implementation required. So certainly, we would want that attach as you might call it to reduce over time.

But really important to us is our ecosystem of implementation partners. Because if we don't scale that, it really makes it challenging to try to take on the majority of the work ourselves. And so for sure, both of those two strategies you're seeing really kind of in the results of keeping our services growth more subdued, and we view that as a successful outcome of our strategy.

Rishi Jaluria -- Founder and Chief Executive Officer

All right, got it. And last one, I'll jump off. But, Ken, as we think about our models for next year, how should we be thinking about that sales and marketing line? I mean, should sales and marketing expenses be growing at a similar rate to maybe forward ACV growth given the investment that you're making and obviously the sales comp incentivizing ACV? Or is there a better way to think about that?

I think it's very fair to think that our sales and marketing expense investment should grow less than our license in cloud ACV growth because we want to get efficiency out of sales and distribution. But we grew that number somewhere in the mid 20s in terms of percentage range for 2018. And our model, if you kind of unpack it, is probably going to see something similar to that in 2019. But that would still show some level of operating leverage from sales and marketing given that assumption and the ACV growth.

Peter, the one thing that may be worthwhile is we actually disclose any customer that's greater than 10% in our financials for the year. And you'll notice that we didn't have one this year. And we would view the federal government as one customer, so that gives you an idea that even all federal government clients don't add up to 10% of our business. So if that's helpful, just to give you like a sensitivity.

Peter Lowry -- JMP Securities -- Analyst

OK, great. Thanks. And then it sounds pretty good, but can you elaborate on how you feel about your current sales force productivity and where you're focused on with your sales and marketing investments?

Alan Trefler -- Chairman & Chief Executive Officer

Yes, I think we've done a very good job, particularly over the last six months, at establishing really good patterns to help us manage the existing sales force and set a standard for being able to onboard additional people. So that's really the key, is to try to have what we call good effectiveness and good productivity as we onboard large groups. What I'm excited about is that the overall productivity levels of the company actually increased in 2018 despite what we would consider to be quite material increases in the selling force. So I'm actually very, you won't find I'm satisfied by much, and I'm certainly not yet satisfied with selling productivity.

We'll now take a question from Steve Koenig with Wedbush Securities.[Unknown speaker]Hey guys, this is Amon [Inaudible] on for Steve. Thanks for taking my question and congrats on the quarter. First off, what would you say Pega's view on the demand environment of today compared to say maybe six to nine months ago?

Alan Trefler -- Chairman & Chief Executive Officer

I would say that it's unchanged. I think the demand environment was strong six or nine months ago. And the demand environment today is also, I would say, extremely strong. There are a couple of geographies that are a little shakier.

I think the whole Brexit and France confusion makes some of those countries a little more different and difficult to project. But we now have a substantial enough footprint that I think we're just benefiting with the fact everybody really is worried about how they improve their operational productivity, whether it's the large banks that are announcing -- Corbat from Citi announced how they are expecting to literally reduce thousands to tens of thousands of staff in the coming decade to improve their efficiencies and make them more competitive digitally. We're a perfect technology to be able to bring customers more closely engaged with their institution and help them gain efficiency by eliminating lots of sort of extraneous, extraneous work. So I see a lot of demand driven by efficiency gains, and a lot of demand driven by companies just wanting to try to secure a better relationship with their customers.

So I view both of those as important levers. And relative to what happened in the various economies, we've always been pretty good at responding to macroeconomic shifts, if you look at our history. And being able to have both the revenue potential of the customer engagement and the savings potential of the operational efficiency makes us feel comfortable continuing to do the investment and believing we'll get that return.

One additional point to kind of add some color to that. 2018 was an incredibly strong year for us, and that was not on the backs of a small number of deals from just one vertical. So I think just thinking about cross vertical, you see a lot of strength in a lot of places, which, for us, we've kind of capitalized on. So I think that's an important thing, to see the strength be more distributed across different industries and just focused on one or two.

So that's been kind of a positive observation we've seen in '18 and into '19.[Unknown speaker]Great, thanks, that's really helpful color. And then one follow up. It seems like your investments and focus on shortening your sales cycles is working and you're seeing your contract durations come down a little bit. I guess looking to next year, how do you expect your duration to trend? And what kind of impact would you say that would have on ACV growth?

So we would expect the contract durations to slightly come down, continue to come down. We don't think we're going to be moving to one-year contracts. I mean, sometimes we will do a one-year contract when it strategically makes sense for a new customer for instance, but it will come down, we believe, from three and a half years. And probably come down somewhere closer to the three to three and a quarter.

So not a massive shift down. We believe that's critical for our flexibility so that we can actually not have additional objections when customers want to buy Pega. Cloud Choice is certainly a great differentiator. So is our ability to be flexible in the contracting structure.

And we view that as a differentiator as well. So we do think it will come down slightly, and we think that that is a tool that we use to help keep our growth accelerating.

Alan Trefler -- Chairman & Chief Executive Officer

So it's interesting, one of the things that I'm proud of as a company because when you make enormous shifts like this, it can be a problem. And obviously, it wasn't in 2018. We moved from a company that was 100% PCV total contract value, where there was an enormous incentive to sign five-year deals, to a company that was 100% ACV with a little bit of sweetener for line. And I think we did that without missing a beat.

We're there as a firm. I don't imagine that in the foreseeable future you'd ever see the duration go under three, on average. That's just not the discussion and the buying mentality. Sometimes when you're dealing with a client who's not really sure if he needs to be able to do a one, but boy, that's really the exception.[Unknown speaker]Great, thanks so much.

[Operator instructions] We'll take our next question from Mark Schappel with Benchmark.

Mark Schappel -- The Benchmark Company LLC -- Analyst

Hey guys. Let me just start off by saying nice job on the quarter. A couple of questions. Alan, with respect to your two principle product lines, BPM and CRM, did any particular one of those drive the revenue upside in the quarter? Or did any particular one of those drive the business in the quarter?

Alan Trefler -- Chairman & Chief Executive Officer

You know, it's pretty balanced. The reality is that the front office has become an increasingly important place for us. That's sometimes in the guise of marketing where one of the world's largest banks, for instance, chose us on Pega Cloud to drive every contact and customer engagement across the channel. It's just an amazing Pega Cloud win again [Inaudible] competitors you'd expect.

And that sort of thing is happening, very exciting. But also, people want efficiency. And being able to tie that customer engagement all the way through to being able to operationalize it, that middle out story we told at PegaWorld? It's resonating. And I'd say it's quite balanced, which gives us a lot of comfort as we go forward.

I would add one small piece of color to that, Mark, which is earlier in the year I was at an investor conference. Earlier in 2018, I was at an investor conference and an investor came up to me and said, hey, the most common thing we're hearing is digital transformation. That was in like January of 2018. And I remember hearing that and thinking, oh, that's interesting.

And so I think what you've seen in 2018 is digital transformation, or the operational efficiency has really kept pace with the front office or the CRM part of the business, which over the last few years has not been the case. CRM has been actually growing faster. So I do think that's really great for us given that we do so well on both sides of that.

Mark Schappel -- The Benchmark Company LLC -- Analyst

Great. Thanks. And then with respect to the BPM business, I know that it's accelerated this year beyond the normal say 6% to 8% growth rate. I was wondering if that acceleration carried into the December quarter?

Good. And then I guess just as a follow up to the prior questions on the sales force. Besides just adding headcount, what are some of the other initiatives that you're planning to focus on the coming year with respect to the sales force?

Alan Trefler -- Chairman & Chief Executive Officer

We've been looking to get our enablement and what we call validation up to another level of sophistication. So we've implemented formal video recording, independent grading of salespeople being able to really show that they've mastered the key messages. We've tied this into what we call integrated selling programs where we really try to get the materials and the content on the web site and the messages that people would use in engaging in clients to be very well integrated and part of the sort of more validated effort. And we really, I think, done an improved job of concentrating our forces and making better choices about where the sales teams should spend their time.

That came out of a lot of work early in the year, really beefing up the operations area and analysis functions, which I'm very excited will continue to help us as we grow the sales force. Normally you expect the performance of -- as you increase the sales force, you'd typically expect average performance to decline. I mean, that's just normal and sensible because ostensibly there are newer people and you've got them assigned to obviously not the absolute optimal clients because your first people would be assigned there. But I think we, with these tools, have the ability to maintain and even improve productivity as we grow.

So that's something we feel good about.

Mark Schappel -- The Benchmark Company LLC -- Analyst

OK, great. And then finally is it fair to assume that the company is still committed to the 2022 targets of 15% to 17% revenue growth and operating margins of 23% to 25%?

Let me refrain that 2022 target. We are committed to rule of 40. We actually believe there's more value if we can get there on a 25% revenue growth and 15% operating margin. But certainly, 17% revenue growth and 23% wouldn't be a terrible outcome either.

But we are striving to accelerate our growth. So think about the commitment being the rule of 40 and the balance of the two, which is kind of the way I framed it. And I think yes, the answer is yes to that.

Hey guys. Just wondering how we should think about your implementation times for cloud versus a traditional rollout. And specifically, is there any differences really on the planning side?

Alan Trefler -- Chairman & Chief Executive Officer

Yes, the cloud rollouts are faster. The simple reality is not having to depend on the client to provision. For a large client, that can take 60 days, sometimes even a little more out of the schedule. So in terms of really trying to get value to customers in 90 days, which has been something we've been really talking about in promoting, the cloud has facilitated that.

And we have dozens of instances during the year where customers achieve that with what I would describe as meaningful application. Now we're not talking about little VS apps with some of the stuff that's out there focuses on. We're talking about things that are are generally going to be intrinsic to the business.

Stephen Bersey -- MUFG Securities Americas Inc. -- Analyst

Got it. And any standout verticals or modules that were either introduced or you think have more to go that you'd like to highlight?

Alan Trefler -- Chairman & Chief Executive Officer

Well, I think on one of our journey to time CRM, which is -- whether that's in terms of doing some of the next best actions or being able to do fulfillment of something that people want to be able to do across a couple of channels and do that, what we call micro journey, a journey at a time where you don't have to go rip out a whole channel, you really insinuate this into a channel. I was recently visiting one of our great clients in Europe, Rabobank, and they were using our technology for both what they call real-time relevance, which is how they described decisioning. And [Inaudible] case management. And they were in a position where they were simultaneously rolling out new client capabilities in a true omni channel way as opposed to the old fashioned way people have historically done things, where you end up having to get the people in the channel to build the stuff out of channels all the time.

So it's really exciting I would say to see a lot of the customer engagement CRM-type capabilities getting taken up in that way.

Stephen Bersey -- MUFG Securities Americas Inc. -- Analyst

Thanks. And maybe on the second half kind of business momentum, skewed toward the second half. I know you're not guiding for the year after, but does that roll into Q1 that strength and Q2? Or do you think there's a similar mix kind of next year?

That's a great question, Steve. So what you should see is if you think about where we are in the cloud transition, the first year is where you take a big hit. You take a big hit the second year largely because the first part of the second year, you still kind of are in a heavy transition. As you get toward the backend of '19, you start to come out of that.

And that's doesn't then go away in the first half of '20, meaning you don't start to come out of the transition positively then revert back. It's kind of a continual coming out. So '20 as a year should actually be much more subdued in terms of the cloud transition effect. '21 would even be less than '20.

And when you get to '22, there really is no impact anymore. So I don't think there's a significant shift in linearity or the seasonality of when revenue hits in the quarters. I think what you're seeing in '19 is more backend loaded because we're still earlier in the cloud transition here.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

10 stocks we like better than PegasystemsWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Pegasystems wasn't one of them! That's right -- they think these 10 stocks are even better buys.